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External Debts and Current Account Adjustments

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  • Bulut Levent

    () (Georgia State University)

Abstract

We empirically investigate the effect of net external-debt positions on the size of medium-term current account balances. We utilize an approach where net external-debt positions dampen the widening of the current account balances. In a simple accounting framework, we find supportive evidence of the adjustment role of the net external-debt positions on the current account balances. Our findings show that net external-debt holdings affect current account imbalances through their effect on private consumption. Government expenditure and domestic investment, on the other hand, are not negatively affected by net external-debt holdings. We show that, on average, developing countries in the sample would have run a 2.7 percentage points wider current account deficit in the absence of the negative impact of net external debts. Net external-debt positions, therefore, reduce the dispersions of current account imbalances and thus increase the correlation of investment and saving ratios.

Suggested Citation

  • Bulut Levent, 2011. "External Debts and Current Account Adjustments," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-53, December.
  • Handle: RePEc:bpj:bejmac:v:11:y:2011:i:1:n:37
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    References listed on IDEAS

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    Cited by:

    1. Jong-Hee Kim & Joocheol Kim, 2014. "Intra and offshore trade in the euro zone and trade imbalances," Applied Economics Letters, Taylor & Francis Journals, vol. 21(15), pages 1060-1064, October.

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